The many paths fintechs are taking to banking's mainstream

The smattering of fintechs seeking bank charters has become a herd.

In just the last six weeks, Square opened a new bank, LendingClub completed its acquisition of Radius Bancorp, Brex applied to open an insured depository and, most recently, SoFi announced a deal to purchase a small California bank to accelerate its quest for a charter.

The tech-fueled upstarts all have different business plans, and they typically have different motivations for seeking a charter. The path they have chosen can be affected by what they prioritize; the benefits of having a bank include getting direct access to the payment system, the ability to use deposits as a low-cost source of funds and the authority to preempt state lending laws.

Whatever their motivations, the fintechs have seized a moment in which industry watchers believe that regulators are likely to receive their applications favorably. That window of opportunity could close as President Biden appoints new leaders at key agencies.

Below is a look at seven fintechs seeking bank charters with the aim of challenging traditional banks more directly.

Varo

After three and a half years and more than 5,000 pages of paperwork, Varo Money in February 2020 became the first fintech to score a national bank charter.

Varo CEO Colin Walsh, above, had long criticized the banking industry for piling charges onto their customers. His company offers accounts without fees — not even for overdrafts, which are limited at $50.

Varo also gives account holders early access to their paychecks. Another offering helps account holders negotiate certain bills and find savings.

The bank is growing rapidly. In the span of just three months, from Sept. 30 to Dec. 31, its assets climbed nearly 250%, to $515 million. according to data from the Federal Deposit Insurance Corp.

Jiko

Jiko Group in Berkeley, Calif., is trying to upend the industry’s deposit-taking model. In September, to lend the idea more credibility, it closed on a deal for Mid-Central Federal Savings Bank in Wadena, Minn.

Instead of holding its customers’ deposits, Jiko invests them in U.S.-backed Treasury bills through a brokerage it controls. The bills get liquidated to cover spending from a debit account or a cash withdrawal. Customers keep the yield earned on the bills.

Jiko was started five years ago by former Goldman Sachs trader Stephane Lintner, above, as a way to simplify the process of moving money in and out of accounts.

The company gained more than a national bank charter when it bought Mid-Central. The acquisition also allowed the fintech to control and pilot its product. Jiko recently launched a mobile app that new customers can use to open an account.

Square

Square Bank, an industrial bank based in Salt Lake City, opened for business earlier this month.

Its parent company, Square, got conditional approval for deposit insurance a year earlier, breaking a logjam on new charters for industrial banks that had lasted for more than a decade.

Bank industry incumbents have decried the revival of the industrial bank charter as an avenue for nonfinancial firms, including Big Tech companies, to evade Federal Reserve Board rules that have long kept banking and commerce separate.

Now that Square Bank has opened, it will become the originator of the small-business loans that Square offers to retailers that use its technology to process their card sales. Previously those loans were issued under a partnership with Celtic Bank, another Utah-based industrial bank. The bank will also offer deposit products.

Square is led by Jack Dorsey, above, who is also Twtitter's CEO. Square Bank is being led by former Green Dot Bank CEO Lewis Goodman.

Brex

Brex, a San Francisco-based fintech that caters to startups, is the latest applicant for an industrial loan charter. In February, the firm filed applications with the FDIC and the Utah Department of Financial Institutions to establish Brex Bank in Draper, Utah.

Brex has hired Bruce Wallace, a former chief operating officer at Silicon Valley Bank, to serve as the CEO of its new bank.

Since its founding in 2017, Brex has worked through partnerships with banks. The firm’s credit card, which offers perks tailored to business owners, such as discounts on Zoom and Slack subscriptions, is currently issued by the $6.3 billion-asset Emigrant Bank in New York.

Brex has said that its bank will expand on its existing suite of products, offering loans and FDIC-insured deposits to its small-business customers.

SoFi

Social Finance, the San Francisco-based online lender, applied last year for a new charter with the Office of the Comptroller of the Currency. It received preliminary conditional approval in October, but still needed sign-offs from the Federal Reserve and the FDIC.

SoFi revised its plan with the announcement Tuesday that it will spend $22.3 million to purchase the $150 million-asset Golden Pacific Bank in Sacramento, Calif., and its holding company. The move allows SoFi to change its de novo bank charter application to a change of control application, which is generally seen as a faster route to a charter than starting from scratch.

A bank charter would allow SoFi to accept deposits that it could use as a lower-cost source of funding for its lending businesses.

The acquisition will enable SoFi to “accelerate our pursuit to establish a national bank subsidiary," CEO Anthony Noto, above, said this week.

LendingClub

LendingClub also elected to enter the banking business by acquisition, agreeing to pay $185 million last year to purchase Radius Bancorp.

The San Francisco-based lender announced the closing of the deal on Feb. 1, less than two weeks after obtaining the final regulatory approvals.

LendingClub, which long partnered with Utah-based WebBank to offer loans across the country without getting licensed in each state, has estimated that jettisoning the partnership model should yield approximately $25 million in annual savings.

The acquisition also gives LendingClub a low-cost source of funding for its loans, plus a suite of deposit accounts that it can sell to its existing customers.

“The move to digital-first banking is accelerating,” LendingClub CEO Scott Sanborn, above, said in a press release after the transaction closed, “and we are now positioned to capture that trend to grow our membership base, to more deeply engage with our existing 3 million members, and to help them keep more of what they earn and earn more on what they keep.”

When the deal was announced, Sanborn noted that Radius was one of only a handful of U.S. digital banks with a national footprint and no legacy branch network.

Figure

Figure Technologies is attempting a more novel entry into the banking industry.

The online home equity lender founded by former SoFi CEO Mike Cagney, above, applied in November for a national bank charter, but the move came with a twist: It would not accept FDIC-insured deposits, but it would take uninsured deposits of over $250,000.

Under this approach, Figure would get the ability to preempt state interest rate laws, and it would avoid oversight by the Fed and the FDIC. Figure has indicated that if the OCC approves its application, it will seek direct access from the Fed to the payment system.

Industry observers have interpreted the Figure application as a way to mimic the benefits of the OCC fintech charter, which has been mired in legal challenges since it was unveiled in 2018. Banking industry incumbents fear that the blueprint, if approved by the OCC, will be copied by other tech companies.

The OCC has yet to rule on Figure’s application.